Question
Scenario Jim Connor is the owner of Frame Gallery, a local framing store located in Nashville, Tennessee. Jim has just received his end of the
Scenario
Jim Connor is the owner of Frame Gallery, a local framing store located in Nashville, Tennessee. Jim has just received his end of the year financial statements from his accountant. When he sees his gross and net income he is dismayed. With almost $250,000 in gross profit, he just doesn't understand why he is always short on cash to pay his employees and suppliers. One of his largest suppliers of framing materials notified him just last month that they would no longer extend him credit and he would have to pre-pay all of his orders. He puts a call into his accountant to set up a meeting with her to discuss the financial health of his business.
Questions
- Judging from the information provided, what type of organizational structure was chosen when the Frame Gallery was created as a small business? What do you think are the reasons behind this decision?
- Using the financial statements provided, calculate the 12 financial ratios discussed in your text using the financial information that is provided below for Frame Gallery,
- Looking at these ratios, are there any of them that look suspicious? If so, which ratios are they and what about them do you believe is cause for concern?
- Using the industry ratios that have been provided, compare Frame Gallery's ratios with those for the industry. What "red flags" do you see when making this comparison?
- What do you think might be causing the deviations that you see between Frame Gallery's ratios and the industry ratios?
- What recommendations would you make to Jim to help him improve the financial performance of Frame Gallery in the future? make a memo to Jim outlining your recommendations, making certain to include your reasons for the recommendation (i.e. ratio analysis and/or comparison to industry ratios).
Financial Statements
Frame Gallery, LLC
Income Statement
For the year ended December 31, 20XX
Merchandise Sales $500,000
Cost of Goods Sold $255,000
Gross Profit $245,000
Wage Expense $140,000
Rent Expense $45,000
General and Administrative $45,000
Total Expenses $230,000
Earnings Before Interest & Taxes (EBIT) $15,000
Interest $5,000
Income before tax $10,000
Tax (@ 25% rate) $2,500
Net Income/(Loss) $7,500
Frame Gallery, LLC
Balance Sheet
As of December 31, 20XX
Assets
Current Assets
Cash and Cash Equivalents $29,500
Accounts Receivable $10,000
Merchandise Inventory $100,000
Prepaid Expenses $7,500
Total Current Assets $147,000
Property, Plant, and Equipment $5,000
Total Assets $152,000
Liabilities
Current Liabilities
Accounts Payable $74,250
Wages Payable $10,250
Total Current Liabilities $84,500
Long-Term Debt $55,000
Total Liabilities $139,500
Owner's Equity $12,500
Total Liabilities and Owner's Equity $152,000
Frame Gallery, LLC
Statement of Cash Flows
For the year ended December 31, 20XX
Cash provided by operating activities
Net Income (loss) $7,500
Changes in operating assets & liabilities
Inventories ($100,000)
Accounts Receivables ($10,000)
Accounts Payable $10,250
Accrued expenses $7,500
Cash provided by (used by) operations ($85,000)
Cash provided by investing activities
Purchases of fixed assets ($5,000)
Cash provided by (used by) investing ($5,000)
Cash provided by financing
Long-term borrowing $55,000
Owner contributions $5,000
Payment of Debt and Financing Costs ($5,000)
Cash provided by (used by) financing $55,000
Change in cash ($35,000)
Beginning cash balance $0
Ending cash balance ($35,000)
Frame Gallery, LLC
Statement of Owner's Equity
For the year ended December 31, 20XX
Beginning Capital $0
Owner Contributions $5,000
Net Income/(Loss) $7,500
$12,500
Owner Withdrawals $0
Ending Capital $12,500
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